Tuesday, November 20, 2007

I've been puzzling over where behavioral targeting takes advertising for the past few months (i.e. here.) It crystallized for me this morning when I started reading IBM's "The End of Advertising as we know It". (I only read the first page, though, so this post isn't an endorsement of whatever IBM went on to say.)

All of the targeting technologies: contextual, behavioral, social, etc. say they will rid the advertising world of it's primal problem: the half of advertising spend that's wasted but we don't know which half. We will call this Bernbach's Law, because I feel like it.

People have misread Bernbach's Law to say that the half of advertising that is wasted can be recaptured, thus doubling ROI. While this may be true in certain cases--like when you have a CMO much smarter than all the other CMOs--I don't believe it's true if everyone uses the same targeting.

Advertising is two interlinked markets. The first is the media market. Media companies spend money creating content to draw eyeballs and then sell access to those eyeballs. The media business is highly competitive so we should expect that media company pricing is driven primarily by the cost of producing and distributing content. (Both of these costs have changed with the advent of the internet, but we're going to take that as a given.)

The second market is companies making products or services and trying to find customers by letting people know about them through advertising. The cost of marketing is built into the cost of the product, so advertisers are less sensitive to the absolute ROI of advertising as they are to their ROI compared to their competitors. (If everybody has an equal handicap, what that handicap is barely matters.)

What does this mean for the future of targeting? What happens when everyone uses targeting and targeting is perfect, when Bernbach's law is no longer true?

If advertisers could put their ad only in front of the fifty people who are likely to buy the product rather than the hundred that might or might not, those other fifty ad slots go begging. Half the advertising inventory will not be bought. This 50% drop in demand should drastically cut prices.

On the other hand, if an advertiser can target better, she should be willing to spend more to get in front of that targeted audience. But how much more? Twice as much? Does the advertiser end up paying less, resulting in lower overall media revenues? Or does media benefit by being able to charge premium prices for all of their inventory?

Here's my prediction: media revenues will rise overall. Media companies that don't participate in the targeting arms race will lose, of course, but otherwise costs of creating and distributing content will remain the same except that the cost of the targeting technology will have to be added in. CPMs will climb as much as is needed to make up for the fewer ad slots bought.

Advertisers will have the same ROIs that they always have had and the cost of the targeting technology will get passed along to consumer prices.

Consumers have always paid for the media they consume by paying more for products that advertise. Now they will pay more to see fewer (albeit more intrusive) ads.